A Rent House Solution

A Rent House Solution

Jerry's and Beth's dilemma was that their retirement income consisted of Jerry's teacher retirement, some social security, and $240,000 that they have saved in a taxable annuity. The income earned from interest on the savings was down to 3.5%, or $8,400.00 per year. The interest rate of 3.5% was considerably less than the 8% interest rate they had planned on. Their home is paid for and they do just fine on the income they have. The extra income, (if they could make more income from their investments), would have allowed them to travel more and enjoy a few extra luxuries. They are both in their late sixties and they will more than likely need a good income for many more years.

I suggested that they buy three $60,000 rent homes in a good working class neighbor hood and rent them at $650 to 750 per month. That would generate $550.00 net per house, per month after taxes and maintenance cost, or a total of $19,800.00 per year in additional income. After buying the homes they would still have about $60,000 cash on hand as a safety cushion. That will give them a return of about 11% on their cash investment.

I explained to them that the homes in this price range are readily available in their town and that finding renters in this price range is easy since that rental rate is very competitive with apartment rents. If they did not wish to deal with the tenants then they can hire a real estate agent who specializes in handling the rentals for a percentage of the rent.

The Advantages to this proposal are:

1. Increased monthly income.

2. Tax savings from depreciation.

3. Income inflation protection from by increasing rents.

4. Inflation protection of the original investment from increasing home re-sale values.

5. Low risk of long term vacancy by buying moderately priced homes with affordable rental rates, in good neighborhoods.

6. Paying cash for the homes reduces the risk of a negative cash flow during vacancy.

If Jerry & Beth do not want to be landlords they could still use real estate to accomplish the same monthly cash flow without the rental worries. See more on this below.

Buy Mortgages - Be a lender.

Where do rich people put their money?

How do you get a 10% to 20% return on your cash?

Where do insurance companies put the premium dollars they collect?

The answer in part is that some of the money they have to invest is invested in mortgages that were purchased on the secondary market. You can do the same thing the big insurance companies do.

If you have a lot of cash to invest, and seek high returns, buying mortgages may be for you. There is a very large market dealing in first and second mortgage notes.

The advantage to this type of investment is that the rate of return is rather high with minimal risk. The disadvantage is that your money is tied up long term and the payments to you include principal as well as interest, requiring you to reinvest the principal part of the payments.

There are brokers who can find mortgages for you to purchase, and some even manage the whole process. You can find your notes to purchase by searching the county records for first mortgage lien fillings, and offer to buy the notes directly from the holders. You could try advertising in the classifieds. You will find mortgage brokers listed in the phone book, and then there are those signs "we buy houses" - someone has to finance the deals, call them, they will love you.

It is possible to get better than a 20% return by buying notes at a discount.

For example: you find a note where the home seller carried back a first lien on his/her home for $40,000 at 8% interest for twenty years. You offer them 90% of the balance owed in cash. The note holder gets $36,000 now and you get the payments with interest on the full $40,000 greatly increasing your return on the $36,000 you actually paid out. That would give you an annual return of over 14% on your $36,000.

More on this at alternative investing, mortgage lending.

Mortgages: A way to earn 10% or more on your money

Buy-Sell-Finance

A way to earn 10% or more on your money

Mortgages:

You buy a home for cash and then re-sell it, (acting as your own real estate agent), and carry the note for the new buyers.

First you let everyone know you are looking for a home to buy for cash. Call all the real estate agents in the area where you want to buy and let everyone you meet know you are a buyer. Look for a good, clean, well-maintained house in a working class neighborhood. When you find a prospective property offer 10% under market price, or less than the appraised value (See the real estate clauses at the end of this report.). You want to buy a house for 10% less or a minimum of $10,000 less than the current appraised value. After you buy the house put up a sign "For Sale by Owner" "Owner Financing". You re-sell the home for the full-appraised value. You carry the note for the buyer at 8% to 14% interest with a 5% down payment.

Will people sell for 10% off the price? Yes! Cash buyers are hard to come by. There will always be someone needing to sell now and they will sell at the discounted price. It can take a while to find the right deal. Be patient and keep looking.

Lets look at what you accomplish with this method. You have a 8% to 10% return on the safest loan you can make, a real estate secured first mortgage. You have more than 5% of your cash back. You saved the re-sell sales commission. You collect 8% to 10% interest on the full selling price, not just on the cash you have invested.

Example: You buy a home worth $100,000 for $90,000 cash. You sell the home for $100,000 with 5% down. You carry the 20 year note on $95,000 payable $916.77 per month principal and interest. (When I carry a real estate note, I collect monthly for the next year's taxes and insurance, as the buyers may not have the discipline to save the money themselves. I like to control things.) Because you only have $85,000 loaned out, after the down payment is accounted for, you get an equivalent rate of return of 11.7% annualized. That is 3 or 4 times the going CD savings rate.

Will people buy at 10% to 14% interest? Yes! absolutely, because of the low down, low closing cost, and easy qualifying. As renters they are not getting any tax advantages, they are not building equity, and they have no pride of ownership. People who buy homes feel they are getting ahead and will take much better care of the house.

What if I need money in the future? You can always borrow against the real estate note you hold. Plus you will be accumulating the payments you are receiving each month. You can always sell the notes on the secondary market.

Real estate purchase contract clauses: I use these two clauses on purchase contracts when I buy property to give me the option of backing out of the deal if a price, or property condition problem arises.

1. This purchase is subject to an inspection by, (your home inspectors name here), that is satisfactory to the buyer.

This will give you a way out of the deal if the home inspector advises you of any problems.

2. The purchase price will be $(xxxxx) or 10% less than the appraised value, which ever is less.

This assures that you are getting a deal on the price. Cash buyers should insist on a deal. If your real estate agent tells you that this cannot be done, get a new agent.

Paperwork for your buyers: Any good attorney can draw up a mortgage note for you for a few hundred dollars. The attorney will help with the paperwork. Spending the money on the lawyer will give you piece of mind knowing the paperwork was done correctly . The title company, or your attorney will record the liens.

Important finance Clause: Add a clause to the note that states that if the buyer pays off the note during the first five years they will have to pay you a 5% pre-payment penalty. You do not want the property paid off as the reason you carried the note was to get the steady income.

What if the buyers don't pay? If your buyer does not pay you, foreclose on the loan and resell the home. You will get another down payment and start all over. I have only had to foreclose one time and I made money on the deal. Have your attorney do the paperwork and document the condition of the home as well as the cost of getting the home ready to re-sell.

So you want to retire early

So you want to retire early enough to enjoy it. Borrow yourself into an early retirement.

When you deposit money into a retirement fund, (such as 401K's, annuities, IRAs etc.), the institution holding the money invests that money in income producing investments. A large portion of that money goes into income producing real estate investments. The more conservative the retirement fund managers are, the more they will invest in real estate or bonds instead of stocks.

Income producing real estate is one of the safest investments you can make. Because this type of investment is so safe, banks are willing to lend 70% to 80% of the cost of the property. Because you can raise rents, you are protected against increasing expenses and inflation. Because of these facts, you can borrow yourself into an early retirement income.

This example assumes you have the money for a down payment. Lets just suppose you went into your bank and told them you found a 16 unit apartment building that you want to buy for $640,000 with the rental income at $7,200 per month.

The banker would tell you that the property would have to appraise for that amount, and you will need 30%, or $192,000, down payment in cash. If you can get a 25% down loan you only need $160,000. There are loan brokers that can get you in for as little as 15% to 20% down.

The first thing for you to do is to find out how much cash you can raise. Find out how much cash you can raise by cashing in all of your IRA's, annuities, stocks, life insurance policies etc. Triple the amount of cash you can raise and you will know how exspensive a rental property you can afford.

Start reading books on real estate investing and learning how to evaluate a deal. Keep in mind there are plenty of professionals who can help you. Once you know how much you can borrow, and how much cash you can raise, start looking for a property that is under priced because of it's cosmetic condition and because the rents are not up to market rates. There are plenty of properties out there that need sprucing up that have rents that have not been increased to the going market rates.

Do not rely only on real estate agents. Advertise that you are looking. For example run a classified ad that says "Wanted 12 to 16 unit apartment building, fax details to 555-5555"

Using our example above, a building that cost $640,000 and has a 30 year mortgage at a 7% interest rate would have payments of $3,000 per month. Assuming you did not raise the rents you would have a gross income, after making your payment, of $4,200.00 a month.

From that gross income you pay insurance, taxes and maintenance. The amount left is your net operating income (NOI). If the expenses added up to $1,500 per month you would have left an income of $2,700.00 per month. A 17% return on your $192,000 down payment.

Spruce up the place and raise the rents 20% and your income goes to $8,640.00 per month, less payments, taxes and maintenance of $4,500.00 per month, and your return goes up to $4,140.00 per month, or a 26% annual return, cash on cash.

Every time you make an improvement, or raise the rents, your properties value increases. Every time you make a payment, your net worth increases by the amount of the principal you paid down.

If you put cash in the bank at a 5% interest rate and wanted the same monthly income of $4,140.00 you would need a cash deposit of $828,000.00.

Think out of the box and you can get very rich.

http://www.pueblo.gsa.gov

Federal information center: Super site about money, saving and investing, retirement, wills, credit and much more.

"Getting ahead is easy, so few people are really trying"
Jim Glasgow

The Man Who Did Not Sell His Property!

The Tax Man Cometh.

Fred had been a general contractor for 40 years. During which time he purchased, and paid for, a 1.5 acre piece of land and a 6,000 square foot metal building with office space that he used for his business. At age 72 Fred was finally retiring. I met Fred at the auction where he was selling off the accumulation of construction equipment and business assets.

I asked if the property was for sell, (I'm always looking for a deal). The property was located on a fenced corner lot in an industrial area that is about 95% occupied. The buildings on the land were in good condition. He asked what I thought the place was worth and I ventured about $360,000. He asked what I wanted it for and I told him I would build another 4000 square foot steel building with minimum office space on the property and rent out both buildings for the income. I did not get to buy the building. Fred decided to keep the property. Fred's reasoning was as follows.

If Fred sells the property for $360,000, less the selling cost and income tax of $116,000.00, he would have $244,000 left to invest. At a return of 5% he would earn an income of $12,200 annually. If Fred leases the building for $3,000 per month he would bring in $36,000 per year and have all the $360,000 still working for him (I think he could get $4,000 per month). As Fred had already depreciated the building to zero, he could not depreciate it again. If Fred builds another building to lease out, he would be able to depreciate the new improvements to shelter some of the rental income.

A year or so later I ran into Fred at a restaurant. Fred said that he built the other building and that he should have retired earlier and gone in to the rental business. My idea turned out to be a great deal for Fred and he could not thank me enough for the encouragement.

Too Much House to little income

 Reverse mortgages

 Marybeth, (age 82), and her husband had raised their kids in a fine neighborhood with low crime and easy access to the city's amenities. But with her husband gone, plus less income from her stock investments due to a long bear market and social security reduced to one check per month, her income was not covering all the monthly cost. Her investment portfolio was shrinking as a result of her need to spend part the principal each month.

Her home was worth about $300,000 and was paid for. She was considering selling her home and renting a condo. Marybeth started looking at rental apartments. She could not find one that suited her lifestyle and she did not really want to move. I suggested that she look into a reverse mortgage to at least, cover the monthly cash shortage and the maintenance and other cost of owning the home. A reverse mortgage could provide her a way to stay in her home.

Marybeth and one of her sons investigated reverse mortgages. They started their search at http://www.reverse.org They learned that she could get up to $12,000 per year from a reverse mortgage on her home. The discouraging factor was the high up front fees charged for a reverse mortgage. (be sure to use an attorney if you decide to do a reverse mortgage).
You can use a reverse mortgage calculator at http://www.goldengateway.com

Marybeth's son decided to act as the bank and send his mother $1000.00 a month with the understanding that he would get his money back, with interest, when the house was sold. She had her attorney do the reverse mortgage paperwork so that there would be no problems when it came time to settle her estate.

She now has her extra income, and she stopped the drain on her retirement savings balance. This arrangement will help assure that her savings will not be gone before she is, and she can afford her current active lifestyle. Marybeth's son has a secure first mortgage investment note secured by a home he knows well.

The interest may be tax deductible to Marybeth and taxable to her son even though it is an accumulation. Check with your tax adviser.

Traditional Retirement Methods

A comment about Roth IRA's.

Roth IRA's are the best gift the U.S. government ever gave us citizens. You put in after-tax money in a Roth IRA investment, (Roth IRA's can be invested in a lot of different ways including real estate), you do not pay tax on the Roth IRA's earnings and you do not pay tax when you with draw the funds (subject to the Roth IRA rules and restrictions). The money grows without a tax liability and is not taxed later. This is a huge advantage. If you do not have a Roth IRA, investigate them. Roth IRAs are a very good deal for everyone with an income under $150,000. For more information go to http://www.irs.gov

The Rule of 72:

The rule of 72 is a math formula that will tell you how many years it takes for money saved at a given interest rate to double. For example: lets say that you are 30 years old and have $10,000 in an Roth IRA earning 10% interest. How much will that $10k grow to be worth when you reach age 65?

Take 10% and divided by 72 = 7.2 years. Every 7.2 years your money will double if invested at 10%. Take your retirement age of 65 less your current age 30 = 35 years to retirement. Take the 35 years and divide by 7.2 = 4.86 times, that your money will double when invested at 10% before you reach age 65. Take $10,000 and double it 4.86 times and you get a total of $297,600. That is the magic of Roth IRAs combined with the magic of compounded interest. Because Roth's are non-taxable, tax liabilities are not considered.

Annuities

Annuities are a common insurance based retirement investment and for anyone who lacks the discipline to save they are good. All I have to say about them is there are far better ways to invest for retirement.

401K

Next best thing to a Roth IRA is a 401K, if your employer matches any part of your investment then they are very good indeed. My advice is to max out your 401K investment. This is a very important asset and you should study the subject. I recently advised my daughter and son-in-law to max their 401K and reduce their Roth IRA to do it. My son-in-law's employer will matched 100% of his contributions up to 3% of his salary and match 50% of the next 2% of salary. That calculates to a 83% return the first year on his contributions from the employers matching alone.

Employer stock purchase plans.

By all means take advantage of any employer sponsored plans. I know one employee of Walgreen's drug stores who accumulated a million dollars of stock using the employee stock purchase plan.

Taxes

Before using any suggestions given here check with your CPA for tax advice. You want to avoid having a tax liability that would reduce your invest-able cash.